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By Gaurav Kashyap, Alpari ME DMCC
Interestingly, the COT report from this past Friday indicates that the net short positions in the Euro actually increased to 77'720 as of October 18, up from 73'795 a week earlier, which might indicate that there could be some short sell rallies in EURUSD. It has been the second consecutive week that EURUSD has lost steam in its buildup to 1.40 and technically, we continue to watch how the pair trades at this key channel where it has found strong resistance.
Markets watch for any European summit announcements
In what could be make-or-break week for the equity & currency markets, all eyes will be on the developments emerging from the ongoing European summit in Brussels. Details have remained sketchy thus far, and once again Euro crosses will be extremely volatile in the lead up to Wednesday's announcement where a "comprehensive plan" is expected to be outlined.
At the top of the Troika's agenda during these meetings will be increasing the size of the EFSF fund with many calling for the fund to double up to at least EUR960bn with some suggesting upwards of EUR1 trillion to see off the risks of contagion spreading and to be a strong enough to back up those other elephants in the room; Spain & Italy. Also on the agenda will be a revised Greek plan, which will see a previously expected 21% haircut on Greek debt increase upwards to 60% which if materializes, would see several European banks woefully under capitalized, particularly those in France, the country with the most exposure to Greek debt and which faces the biggest threat to its revered AAA rating.
And finally, the issue of European bank solvency will be addressed with many expecting to see EUR100-200 billion in recapitalization being required. With the tier 1 capital ratio increasing to 9%, banks such as Credit Agricole, Societe Generale, Commerzbank and Deutsche all could be at risk. Fundamentally the long-term picture doesn't look so bright for Euro traders, but we expect to see some short term bounces in EURUSD particularly if that sixth tranche of bailout to Greece will be passed.
US stocks rally on solid Q3 resutls
Across the pond, comments from Fed Vice-Chairman Yellen on Friday heightened speculation about the possible introduction of QE3 which lead to additional US Dollar weakness. In her comments, Yellen said "Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation." Her comments come on the back of Fed Governor Tarullo who said the Fed should resume their asset purchase plans to combat unemployment which has remained stubbornly high above 9% for the past 30 months.
US stock markets continued to build on their impressive gains from earlier in the week following the news and the S&P closed the week more than one percent higher. With the third quarter earning season in full swing, US stocks have rallied on some rather solid results. This week saw Citibank, Verizon and AT&T beat expectations while market heavyweight Apple missed out on expectations for the first time since 2004.
On the economic docket, Monday's empire manufacturing index dropped to -8.48 (v -8.82 prev) while industrial production increased to 0.2% (up from 0.0% previously). The producer price index grew year on year to 6.9% (v 6.5% prev) while the CPI increased to 3.9% (up from 3.8% prev). And finally, the Philly fed index increased to 8.7 (v -17.5 prev). The upcoming week sees the release of the US GDP reading (expected at 2.5%, previously 1.3%) with personal income and spending data to close out the week.
UK pound, Australia Dollar see gains
And finally, the past week saw the British Pound gain more than 0.50% and 0.75% against the Euro and US Dollar respectively after some better than expected data from the UK. Consumer prices increased to 5.2% (up from 4.5% previously) while retail sales also picked up (0.4% act v -1.0% prev).
It was also another good week for the Aussie Dollar which benefited from improving risk appetite and a weaker US Dollar. The Aussie closed above 1.0370 levels against the Greenback and will take cues this week from the outcome of the European summit. Also coming up this week is the release of consumer prices, with expectations at 3.5% (down from 3.6% previously).
Staff
